Flux Power Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017, the company’s fiscal first quarter of 2018 (comparative period: three months ended September 30, 2016). Flux designs, develops and sells lithium-ion batteries and battery-management systems for industrial equipment, including forklifts.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2017 | Quarter ended Sep. 30, 2016 |
|---|---|---|
| Revenue | $153,000 | $293,000 |
| Gross loss / gross margin | $(145,000) / (95%) | $(175,000) / (60%) |
| Operating expenses | $1,165,000 | $929,000 |
| Operating loss | $(1,310,000) | $(1,104,000) |
| Net loss | $(1,446,000) | $(1,179,000) |
| Net loss per share | $(0.06) | $(0.05) |
| Cash used in operations | $(1,549,000) | $(1,226,000) |
- Revenue declined 48%. Gross loss narrowed in dollars, but gross margin worsened as cost of sales equaled 195% of revenue, versus 160% a year earlier.
- Research and development expense rose 63% to $478,000, primarily reflecting development of larger Class 1 and Class 2 forklift battery packs. Selling and administrative expense increased 8% to $687,000.
- Interest expense increased to $136,000 from $42,000, principally because of borrowing under the related-party credit facility. Net loss increased 23%.
- At September 30, cash was $40,000; current assets were $1.876 million and current liabilities $871,000. Total assets were $1.994 million, total liabilities $8.166 million, and stockholders’ deficit $6.172 million. The balance sheet included $1.756 million of inventory.
- Financing provided $1.495 million during the quarter, entirely from borrowings under the related-party line of credit. Cash fell by $81,000 from $121,000 at June 30.
Material changes, outlook and risks
- Management attributed lower sales to refocusing the sales effort on large end-users and building the sales team, and expects this approach to support improved sales. The filing does not provide formal revenue or earnings guidance.
- An October 2017 purchase order from a leading forklift OEM was for $550,000 of LiFT Packs, scheduled to ship at the end of November; the company said the order would represent more than 50% of fiscal 2017 revenue. A similar January 2018 order was under discussion, not reported as secured.
- Management anticipated Class 1 prototype customer evaluations beginning in November 2017, with commercial production targeted for fiscal Q3 2018. Class 2 development was expected to follow by about two months. The company also anticipated receiving ISO 9001 certification in November 2017.
- The filing raises substantial doubt about the company’s ability to continue as a going concern. Management estimated it would need approximately $5 million in financing for the 12 months following the November 14, 2017 filing date, and said additional funding may be needed afterward. Funding was not assured; failure to obtain it could require cuts to sales, product development and capital spending.
- The Esenjay related-party line of credit bears 8% interest, is convertible at $0.60 per share and matures January 31, 2019. Outstanding principal was $6.680 million at September 30 and $7.415 million at November 14; further draws were subject to lender approval. Esenjay beneficially owned about 64% of outstanding shares as of November 14. A separate $500,000 shareholder convertible note bears 12% interest and matures October 27, 2018.
- Customer concentration was significant: three customers represented about 71% of quarterly revenue. Three suppliers represented about 50% of inventory purchases. Management cited low production volumes, early product designs, limited sourcing and warranty costs as factors weighing on gross margin; about $16,000 of inventory was written off as obsolete during the quarter.
- After quarter-end, the company granted 1.97 million stock options to employees and directors, with aggregate estimated grant-date fair value of $806,000. The company also completed a 1-for-10 reverse stock split effective August 18, 2017; share and per-share data were retrospectively adjusted.
- No legal proceedings expected to have a material adverse effect were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether the company obtained the financing needed to address the stated going-concern shortfall, and the terms and dilution implications of any financing.
- Whether the $550,000 OEM order shipped as scheduled, generated the expected revenue, and led to additional orders.
- Whether product development and targeted Class 1/Class 2 launch timelines were achieved, and whether gross margins improved as planned.
- How customer and supplier concentration, warranty costs, and reliance on inventory affect revenue stability and cash needs.
- The full related-party debt terms, future draws and conversion exposure, including Esenjay’s control position.